BREAKING NEWS: Government Agrees To Citigroup Bailout

 The U.S. agreed to take unprecedented and necessary steps to stabilize Citigroup (or perhaps "destabilize" to some) by moving to guarantee $306 billion in troubled assets on the bank's books. Here is the official detail terms of the U.S. Government and Citigroup deal.

(Source: Wall Street Journal)

Short Summary of the Massive Deal:

Eligible Assets: Asset pool consisting of loans and securities backed by residential real estate and commercial real estate, and their associated hedges, as agreed, and other such assets as the U.S. Government (USG) has agreed to guarantee. Each specific asset must be identified on signing of guarantee agreement. Assets will remain on the books of institution but will be appropriately “ring-fenced.”

Size: Up to $306 bn in assets to be guaranteed (based on valuation agreed upon between institution and USG).

Term of Guarantee: FDIC standard loss-sharing protocol: Guarantee is in place for 10 years for residential assets, 5 years for non-residential assets.

Deductible: Institution absorbs all losses in portfolio up to $29 bn (in addition to existing reserves). Any losses in portfolio in excess of that amount are shared USG (90%) and institution (10%).

To read more detail, click this official terms of the deal.

As many investors expected, Citigroup got US government's bailout package today Sunday Nov 23, 2008. Once a big global bank like Citigroup got this massive 10 years bailout, all others bank will ask for possible bailouts too rather than going bankrupt since there are really no good alternatives.  It appears that more pain is most likely going to come to other big and 'supposedly safe' banks. Problem is US government with its 'sinking and limited' bailout fund will need to pick and choose and not appear unfair (e.g.: Lehman collapsed with no goverment bailout). Another real problem: US government is running double deficits in the trillion of dollars (and increasing every month) and hence any expensive bailouts including this one will need to be financed (in fact, have been financed heavily) by borrowing more money via selling US treasury bonds to foreign investors/governments. The critical question is: Are these foreign investors still willing to buy these bonds (read: finance US bailouts) now considering how much losses they have experienced and potential more losses the financial sector will endure for many years to come? Minimal additional investment is very likely. As such, not only the rebound in the US stock market will be mostly short-lived, US Dollar currency level also appears to be artificially high now against global currencies especially againts currencies of countries that have surplus (both trade and budget) and hence, could sink. Caution, this scenario could easily be moving in completely different direction if global investors' confidence in the long-term nature of US economy is still very strong or at least above average. As the great late J.P. Morgan once said "If you have to ask how much it costs, you can't afford it."